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SHADOW OPEN MARKET COMMITTEE
Policy Statement and Position Papers
March 11-12,1979
1. SOMC Members - March 11,1979
2. Shadow Open Market Committee Policy Statement, March
12,1979
3. Redefining the Monetary Aggregates, Statemtent on Monetary
Aggregates, Prepared by the
Shadow Open Market Committee, March 12,1979
4. Position Papers
Statement Prepared for the Hearings on the Conduct of Monetary
Policy, Held Pursuant to
the Full Employment and Balanced Growth Act of 1978 - Karl
Brunner, University of
Rochester
Recent Monetary Reversals- Homer Jones, Federal Reserve Bank of
St. Louis
Economic Projections-Jerry L Jordan, Pittsburgh National
Bank
Economic Outlook - Beryl W. Sprinkel, Harris Trust & Savings
Bank
Weekly Federal Reserve Report - H. Erich Heinemann, Morgan
Stanly & Company
Exchange Rate and Inflation -Wilson E. Schmidt, Virginia
Polytechnic Institute
A Report on Fiscal Policy for the Shadow Open Market Committee -
Rudolph G. Penner,
American Enterprise Institute
Money Multiplier Forecast Errors - Robert Rasche and James
Johannes, Michigan State
University
Means of Financing of U.S. Budget Defecit 1976-78
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SHADOW OPEN MARKET COMMITTEE
\\ The Committee met from 1:30 p.m. to 8:00 p.m. on Sunday,
March*£>, 1979.
Members:
Professor Karl Brunner, Director of the Center for Research in
Government Policyand Business, Graduate School of Management,
University of Rochester,Rochester, New York
Professor Allan H. Meitzer, Graduate School of Industrial
Administration, Carnegie-Mellon University, Pittsburgh,
Pennsylvania
Mr. H. Erich Heinemann, Vice President, Morgan Stanley &
Company, Inc. New York,New York
Dr. Homer Jones, Retired Senior Vice President and Director of
Research, FederalReserve Bank of St. Louis, St. Louis, Missouri
Dr. Jerry Jordan, Senior Vice President and Chief Economist,
Pittsburgh NationalBank, Pittsburgh, Pennsylvania
Dr. Rudolph Penner, American Enterprise Institute, Washington,
DC
Professor Robert Rasche, Department of Economics, Michigan State
University, EastLansing, Michigan
Professor Wilson Schmidt, Department of Economics, Virginia
Polytechnic Institute,Blacksburg, Virginia
Dr. Beryl Sprinke!, Executive Vice President and Economist,
Harris Trust and SavingsBank, Chicago, Illinois
Dr. Anna Schwartz, National Bureau of Economic Research, New
York, New York
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POLICY STATEMENT
Shadow Open Market Committee
March 12, 1979
A surge of inflation in 1978 and 1979 has made the effects of
excessive
monetary and fiscal stimulus visible to all. Inflation reached
an average of 9%
in 1978 and is likely to be even higher in 1979. In the past two
years, the
dollar has depreciated substantially against the currencies of
our trading part-
ners. Oil price increases have added to the costs borne by
consumers and pro-
ducers. Although political events in Iran contributed to the
most recent rise
in oil prices, most of the current inflation is the result of
misdirected eco-
nomic policies of the Federal Reserve and the Federal Government
in recent
years.
Many forecasters predict that recession and rising unemployment
will add to
the nationfs economic problems in 1979. Recessions have occurred
at irregular
intervals during most of our history, and no fundamental change
has occurred to
break the pattern. The occurrence of a recession possibly could
be postponed by
increasing monetary and fiscal stimulus; however, additional
stimulus at this
time would further raise the ultimate cost of reducing
inflation. The Shadow
Open Market Committee is strongly opposed to the adoption of
stimulative fiscal
and monetary policy to postpone a recession.
The desire to "do something11 about rising inflation appears to
have pro-
duced a shift towards antiinflation policy in recent months. It
should be
recognized that inflation this year has largely been
predetermined by past
policies. Increasingly restrictive steps over the coming months
should be
avoided, but also the temptation to reverse policies once again
when the economy
slows must be resisted.
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The principal aim of economic policy, now and in the future,
should be to
establish conditions under which the U.S. and other market
economies can achieve
stable, noninflationary growth and rising standards of living in
the 1980's.
Another round of "stop and go" culminating in higher inflation
and slow growth
of productivity in the early 1980's is a highly probable outcome
if a break with
past approaches to stabilization is not made at this time.
What Has Been Done
For the fifth time in two decades, lower inflation and a smaller
budget
deficit are given high priority in the rhetoric about economic
policy. But the
words will not necessarily be matched by deeds. Announced
policies are likely
to increase instability in the near term, while not offering any
assurance of
increased stability in the early eighties.
Current economic policy has three main features:
(1) A pitiably small reduction in the proposed budget deficit
for
the fiscal year starting next October, to be achieved
principally
by allowing inflation to increase taxes. Estimates by the
Con-
gressional Budget Office show no reduction in the budget
deficits
for fiscal 1980.
®(2) An unprincipled sylcem of coercion masquerading as
volun-
tary price and wage restraint. Programs of this kind confuse
the
symptoms of inflation with the causes of inflation, encourage
strikes,
involve the President and his staff in collective bargaining
to
the detriment of that process, impose large costs of
compliance,
arbitrarily restrict the incomes earned by particular groups
of
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workers and firms, but do nothing to slow inflation. The many
at-
tempts at formal or informal wage and price controls, here
and
abroad, during the past fifteen years have not produced suc-
cess for any policy of this kind.
(3) Continued emphasis on the level of short-term interest
rates as a measure of the degree of monetary restraint. In
the
past, emphasis on interest rates has caused excessive
monetary
growth and rising inflation during years of economic expansion,
and
insufficient monetary growth and recession at other times.
In 1976, 1977 and 1978, the Federal Reserve refused to permit
modest,
prompt increases in interest rates in response to the borrowing
demands of
the public and private sector. Instead, money growth and
inflation rose, and
the dollar fell on foreign exchange markets. Eventually, market
interest rates
and inflation rose to much higher levels than would have been
required if a
policy of gradually reducing money growth had been followed in
these years.
Now the risks are in the opposite direction. If private demand
for credit
were to slow, a policy of controlling short-term interest rates
would cause
money growth to fall. The economy would be pulled into a deeper
recession than
is required to slow inflation.
The risks of serious recession are increased by the absence of
reliable
information about the nation's money supply. The interaction of
inflation with
interest rate ceilings, complex reserve requirements, and new
regulations prevent
the public and the government from knowing what is happening to
actual money
growth. Congress should promptly eliminate restrictions on the
payment of
interest on demand, time, and savings deposits as part of a
program to restore
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What Should Be Done?
The high priority now given to controlling inflation will have
no lasting
effect on inflation unless it is a part of a sustained program.
Anything less
than a sustained program, lasting three to five years, would be
a costly, wasted
effort. After fifteen years of rising inflation and many
commitments by past
administrations and Federal Reserve officials, skepticism is
large and govern-
ment credibility is small.
At our meeting last September, we urged that monetary growth be
reduced as
one part of a program to end inflation and restore stability
within the next
five years. Although excessive monetary growth continued in the
fall, there is
growing evidence that the annual growth rate of money has now
been reduced even
after adjustment for change in definitions. We believe that
further reductions
in the annual growth rate of the money aggregates at this time
would be a mis-
take. Instead we urge:
One - the importance of growth in monetary aggregates is now
widely recog-
nized. Uncertainty about these growth rates can lead to major
errors in the
interpretation of monetary policy and to severe recession or
increased infla-
tion. Uncertainty can be minimized only if Congress removes
controls on the
payment of interest on demand and time deposits. Continued
failure to act
imposes large risks and small benefits.
Two - the growth of the monetary base should be 8% for the year
ending in
August 1979. This is consistent with the recommendation of this
Committee at
our meeting in September 1978, when we selected the monetary
base, as published
by the Federal Reserve Bank of St. Louis, as the most reliable
measure of mone-
tary growth currently available in this period of uncertainty
about the interpre-
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controllable by the Federal Reserve since changes in the base
are the direct
result of changes in the Federal Reserve portfolio. To control
the size of its
securities portfolio -- which is the principal source of the
monetary base
— the Federal Reserve must allow short-term interest rates to
respond freely
to forces in the open market.
Three - we have urged repeatedly that the Federal Reserve adopt
a five-
year program to end inflation by reducing the growth rate of the
monetary base
by 1% a year for the next five years. The need for a program of
this kind has
now been recognized by Chairman Miller. During the past four
months, the Fed-
eral Reserve has not made any effort to announce and implement
the program. The
Federal Reserve can reduce the cost of ending inflation by
publicly accepting a
commitment to sustained, gradual, but persistent reductions in
money growth.
Four - productivity has grown at an average rate of 1% for the
past two
years. Capital investment has lagged behind the growth of the
labor force. To
encourage investment and output, Congress should further reduce
the growth of
government spending (including off-budget items) below the
recommendations of
the President, and reduce real tax rates. A tax reduction bill,
to reduce the
real burden of taxation on households and firms should be passed
early in the
session to encourage investment.
Five - to reduce uncertainty in financial markets, Congress
should move at
once to repeal the Credit Control Act of 1969 and the
International Emergency
Economic Powers Act of 1977. These laws -- which, respectively,
create standby
authority for (1) direct government control of domestic
financial markets and
(2) the imposition of foreign exchange controls in peacetime --
are unnecessary.
Should the Administration ever implement these authorities, the
result would be
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REDEFINING THE MONETARY AGGREGATES
Statement on Monetary Aggregates
Prepared by the Shadow Open Market Committee
March 12, 1979
Monetary aggregates are now widely recognized as important
indicators of
exchange rates, interest rates, inflation, and economic
activity. Central banks
in several countries now seek to control some monetary
aggregates, and even the
Federal Reserve states target rates of growth for various
monetary aggregates.
Governments, central bankers, investors, and savers throughout
the world draw
inferences about the future by observing trends in monetary
aggregates. While
foreign central banks have employed some variant of the monetary
base concept,
the Federal Reserve has stated its targets exclusively in terms
of the money
stock concept.
The monetary base statistics have proven to be accurate and
reliable over
extended periods of time. However, money stock statistics
periodically have
been subject to major revisions after the identification of
measurement errors.
As long as errors in the reported statistics remained small or
could be regarded
as constant, no major problems of interpretation arose.
Currently, errors ap-
pear to be large and variable. The possibility of a major error
in monetary
policy or in private decisions based on a misinterpretation of
monetary aggre-
gates as currently recorded has increased.
The Federal Reserve Bulletin for January, 1979, invited
interested parties
to comment on the staff's proposals to redefine the monetary
aggregates so as to
reduce potential errors of interpretation. Our Committee
believes that the
proposed changes in definition are in the right direction.
However, the published
proposal neither addresses the central problem nor fully adjusts
the definitions
for past changes in financial arrangements. Measures of the
monetary aggregates
can never be entirely accurate, but current errors can be
reduced to more
acceptable levels.
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The staff of the Board of Governors proposes two principal types
of change
to M-l and M-2. One removes deposits of foreign banks and
official institutions
from these aggregates. The other adds consumer-type transaction
deposits at
thrift institutions to the aggregates.
The proposal does not incorporate into the monetary aggregates
the effects
of substantial changes in businesses1 asset management practices
such as the use
of overnight repurchase aggreements, overnight Euro-dollar
deposits and other
relatively close substitutes for bank deposits. These practices
appear to have
as much importance for the levels and rates of change of
monetary aggregates as
the items in the staff proposal. Currently, there are no
comprehensive measures
of these items. The Federal Reserve should promptly institute
sampling proce-
dures to assure adequate measurement.
It is regrettable that the Federal Reserve did not foresee the
need to
change its data collection procedures in advance of the
regulatory changes it
recently instituted. Future changes in regulatory practice
should be coordinated
with monetary policy and data collection.
The Central Problem
The central problem cannot be solved permanently by changing
definitions.
There is now a large and rapidly growing volume of financial
assets not subject
to ceiling rates on deposits, not covered by Federal Deposit
Insurance programs,
and in some cases not subject to reserve requirements. The
private benefits
from these arrangements are entirely the result of archaic
regulations and con-
trols on interest rates.
Interest rate controls on savings, time, and demand deposits
encourage
innovation to circumvent regulations. Differential reserve
requirements for the
types of liabilities issued by banks and non-bank institutions
provide additional
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incentives to innovate. The relatively high market rates of
interest, resulting
from past and currently anticipated inflation, increase the
incentives for
owners and issuers of financial liabilities to circumvent
regulations and con-
trols on the payment of interest. The net social cost resulting
from misinfor-
mation about the growth of the aggregates is high and probably
is rising.
The proper remedy is to remove these restrictions and controls.
The Con-
gress, the Federal Reserve, the Federal Home Loan Bank Board,
and other regulatory
agencies should act promptly to remove controls on interest
rates and other
incentives to socially wasteful innovation.
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Statement Prepared for the Hearings on the
Conduct of Monetary Policy
Held pursuant to the Full Employment and Balanced Growth Act of
1978
U.S. House of Representatives
Committee on Banking, Finance and Urban Affairs
Washington, D.C.
February 22, 1979
Karl Brunner
University of Rochester
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1. The Full Employment and Balanced Growth Act of 1978
I appreciate the opportunity to present my views to this
Committee
concerning the course of monetary policy best designed to
promote the goals
of the Full Employment and Balanced Growth Act of 1978. This Act
establishes
medium and long term goals for both inflation and unemployment.
Inflation
sould be lowered to 3% p.a. by 1983 and completely vanquished by
1988. Un-
employment for individuals aged twenty and over need be reduced
to 3% and
among all persons aged sixteen and over to 4%. These
unemployment levels
should be realized by 1983 and subsequently maintained into the
future. The
Act also declares Congressional intentions addressed to capital
formation,
rising productivity and increasing real income per capita.
Congress rejects
thus the prospects of permanent stagnation advanced by assorted
groups
advocating a nnon-growth economyn. Congress also rejected the
views advanced
with increasing frequency that we should accept a permanent
inflation and
accommodate our policies to this fate.
2. The Inflationary Heritage of Past Policies
The apparent interest of Congress in price-stability and
economic growth,
at least as expressed in the Act of 1978, should stimulate
concern about the
performance of our economy in the 1970's. The drift in inflation
and unem-
ployment was not produced by blind fates beyond our reach. We
contribute
to this drift with the dominant trend in our economic policies.
This fact
holds most particularly for the case of inflation. The
differences in the
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behavior of the general price-level between the period 1960-1965
and the
1970fs and similar differences in other countries or between
countries are
not determined by mysterious social forces. Nor is the relative
intracta-
bility of recent infltion in the USA particularly surprising.
The level and
persistence of our inflation is essentially the product of our
monetary policy
pursued since 1965. This policy produced a monetary growth
pushing nominal
gross national product at a rate of expansion exceeding the
average rate of
real growth. Economic agents in the private sector unavoidably
adjusted their
price and wage setting to this nominal expansion maintained over
many years by
the Federal Reserve Authorities. The sequence of abandoned
attempts at an
anti-inflationary policy (1966, 1969, 1971/72, 1974/75) confirms
prevalent
expectations of a persistent inflationary policy. Wage- and
price-setters
show little inclination under the circumstances to adjust their
behavior to a
temporary reduction in monetary growth and to the passing
retardation of
nominal demand. Both our current inflation and its apparent
intractability result
from the pattern of policies cultivated by our monetary
authorities.
3. A General Program of Monetary Policy
The recognition of the underlying cause driving our inflation
determines
the course of policy pushing the economy nearer to the goals
expressed by
Congressional legislation. A stable price-level requires that
the Federal
Reserve hold the growth rate of the monetary base to around 2%
p.a. The
combination of this growth with the expected trend in the
monetary multipliers
and monetary velocity produced by a gradual diffusion of
institutional inno-.
vations determines approximately a trend growth of 3% p.a. in
nominal gross
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national product. This implies under the circumstances a normal
rate of
growth in real output of about 3% p.a. and a stable price-level.
With a
different normal real growth or a different trend in multiplier
and velocity
than implicitly used in the previous assessment suitable
revisions in the
medium term growth rate of the monetary base yield closer
approximation to
the stability of the price-level required over time. A well
managed
Federal Reserve Authority with a definite commitment to its
public responsi-
bility would learn from experience as the situation evolves the
approximate
magnitude of the non-inflationary growth rate of the monetary
base. At the
moment and on the basis of our available information it seems
quite adequate
to use 2% as a benchmark for 1988 or even somewhat earlier. The
probable
errors are small relative to the magnitude of the current
inflation. The
path of the monetary base determined by its initial position
(around 9% p.a.
in 1978) to the benchmark level set for 1986-1988 would assure
an unambiguous
reduction of the rate of inflation to a small fraction of the
inflation emerging
during the winter 1978/79.
4. The Implementation of the Program
The implementation of this general program requires some
attention. The
non-inflationary level can be approached in many different ways.
If we knew
with certainty the economyfs complex dynamic structure and the
patterns of
changing expectations induced by new information the move to a
non-inflationary
state could be realized under optimal conditions in terms of the
social costs
associated with the transition. The revisions of expectations
would moreover
induce rapid changes in price-wage setting in case the new
policy is
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(miraculously) accepted by the public with full confidence as an
expression
of a determined and sustained effort. The social costs of the
transition
would be lowered to a minimal level under the circumstances.
Unfortunately
we do not possess this information and we must grope for a path
in a murky
fog. An immediate reduction of the growth rate of the base from
9% to 2%
induces most likely a recession with losses in output and
employment. The
low credibility attached at this time to any sustained
anti-inflationary
monetary policy raises the social cost of the transition as it
lengthens
the time required for the adjustment in price-wage setting
behavior. It
should be noted however that the moderation in the growth of the
base required
for our proposal is substantially smaller than the retardation
observed in
1920/21 or in 1936/37. It would be somewhat larger than the
retardation
imposed by the Fed in 1948/49 and other postwar recessions. The
loss in
output and employment resulting under the circumstances fosters
most likely
political pressures forcing a reversal of monetary policy onto a
renewal of
the inflationary game. I know of no way to determine a path for
the monetary
base which will assure us the absence of any social cost of
transition or promise
that we move along an optimal trajectory in terms of social
cost. My best
suggestion under this uncertainty shared by all of us indicates
a gradual
approach explicitly announced and well articulated to the
public. According
to this approach the Fed should announce once and for all in a
manner con-
veying a convincing commitment that it plans to lower the growth
rate of the
monetary base each year by one percentage point until we achieve
a stable
price-level. This policy need be announced now and initiated for
1979. The.
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White House should also commit its prestige, as it is, in
support of this
policy and make clear that it will not tolerate any deviation
from the
announced path.
5. The Implementation of the Program: Changes in Procedures
and
Conceptions Governing the Fed's Policy-Making
The simple proposal involves no technical complications and
difficulties.
The Federal Reserve Authorities possess all the technical means
for an
effective execution of such a policy. It will require however
somewhat of
a revolution in the conception and procedure of the Federal
Reservers
bureaucracy. The Federal Reserve continues to formulate and
implement
policy according to an old pattern. This pattern,and its
consequences with
respect to economic stability,has been described in detail in a
study on
Federal Reserve Policy Making jointly prepared for this
Committee in 1964
by myself and Allan H. Meltzer. The Shadow Open Market Committee
also
commented repeatedly in recent years on this problem. The Fedfs
traditional
procedure seriously impairs the control of monetary growth and
the growth
of the monetary base. It obstructed in the past four years the
realization
of Congressional intentions expressed by HC 133 (March 1975) and
the recent
revisions of the Federal Reserve Act. This obstruction was
reenforced by the
Fedfs conception traditionally dominating its views of monetary
events and
monetary processes. The conception inherited by the Fed!s
bureaucracy essen-
tially denies the relevance of monetary aggregates and blinds
the Fed to the
crucial role of monetary growth in the inflation process. The
internal pro-,
cedures combined with the old conceptions explain the fact why
the Fed so
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miserably failed to satisfy the Congressional intentions over
the past four
years.
6. The Implementation of the Program: Institutional Reform of
Adequate
Information
The change in procedures and conception of the Fedfs bureaucracy
must
be supplemented with two other groups of measures in order to
improve our
policy-making in a manner better suited to achieve Congressional
goals.
Some of the institutional arrangements in the US monetary system
are not
well designed for an effective control over monetary growth. The
prevailing
structure of reserve requirements and the ceiling on interest
rates imposed on
checking and time deposits produces under inflationary
circumstances serious
distortions in the measured monetary aggregates. These
distortions lower
the information content of the data and impair any rational
assessment in
policymaking. These distortions have recently been aggravated by
increasing
errors impounded into the traditional measures of M. and M?.
Institutional
innovations (AFT accounts, NOW accounts, broker and money market
fund
checkable accounts and overnight repos) in the financial
industry erode the
meaning of the published data. There remain however some
questions concerning
the adequacy of the published date even in the absence of the
evolving in-
stitutional innovations. Several years ago a special Committee
constituted
by the Federal Reserve Authorities recommended several
modifications in the
assembly and preparation of data for the measurement of monetary
aggregates.
It seems most urgent at this time that the Federal Reserve
Authorities be
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advised that their responsibility defined by the Federal Reserve
Act and the
Full Employment and Balanced Growth Act requires a systematic
reexamination
of their measurements. Inadequate measures increase the
uncertainty con-
fronting policymakers and economic agents. They also offer
opportunities
for useful exploitation by the Fed's bureaucracy in order to
produce sufficient
verbal smog to obstruct the movement to a non-inflationary path
of the relevant
monetary magnitudes. It is important to emphasize in the present
context
however that we need not suspend any relevant action until the
studies of
new Committees or the enquiries made by the Fed are terminated.
The Fed can
immediately initiate the necessary changes in implementation
proposed by the
Shadow Open Market Committee in recent years, modify some
arrangement (e.g.
reserve requirements), actively propose some other modifications
(structure
of reserve requirements, interest ceilings on deposits) and most
particularly
announce a commitment to lower the growth rate of the monetary
base by one
percentage point each year in the manner indicated above. We
note in passing
that the monetary base suffers at most vanishing measurement
problems. It
suffers on the other hand under the Federal Reserve's systematic
refusal to
recognize its central position in the money supply process.
7. The Significance of Fiscal Policy
My statement concentrated thus far on monetary policy. A short
comment
bearing on the role of fiscal policy need be added at this
point. The direct
effect of budget and deficit on the rate of inflation is
comparatively negligible.
An expansion of government expenditures on goods and services
tends indeed to
raise the price-level. But such expansions contribute (directly)
little to
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to our inflation. A similar situation holds for the deficit. The
direct
effect of the deficit on the rate of inflation vanishes in
comparison to the
importance of the mode of its financing. The deficit exerts
however an
indirect effect of some importance on the inflation motor. The
nature of
the political process lowers the likelihood of a
non-inflationary monetary
policy under the circumstances of a persistent and large
borrowing requirement
by the Federal Government. It would thus seem advisable that
fiscal policy
contribute with a balanced budget to the goal addressed by
Congress. The
comparative irrelevance of the direct effect of budget and
deficit on in-
flation does not imply however the irrelevance of these fiscal
magnitudes in
terms of our welfare. A large and increasing budget absorbs
resources by
the government sector. These resources are used less
productively and more
wastefully in this manner than in the private sector. Rising
government
expenditures on goods and services lower in the average real
investment and
real consumption and lower over time our economic welfare.
Rising government
expenditures in any form expand moreover the power and reach of
the bureaucracy.
The citizen's control over an ever expanding government sector
forms a major
problem for our political future beyond the threat of permanent
inflation.
8. The Objections to Anti-Inflationary Monetary Policy
The program submitted in my statement is hardly uncontested. It
is
opposed on the grounds that the social cost of transition to a
stable price-
level is too high. The argument asserts in particular that the
social cost
of permanent inflation is small when compared to the social cost
of an
anti-inflationary policy. This discrepancy in social costs
determines that
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policy should rationally accommodate a persistent inflation
built into the
economy. Another objection contends that inflation involves a
social process
essentially independent of monetary growth. A reduction in
monetary growth
produces under the circumstances a permanent loss of output and
employment.
It is useless and harmful in this view to tame inflation by
means of monetary
control. Lastly, one may concede some usefulness to
monetary-fiscal restraints
but argue that such t!general measures11 be supplemented by
nspecific and
structural1' measures.
a. The Social Cost of Anti-Inflationary Policy
The case for a permanent inflation in terms of the social cost
of anti-
inflationary policy involves essentially an irrelevant
comparison. It com-
pares the transition to a stable price-level with a stable and
fully antici-
pated inflation. But this comparison is hardly relevant for our
purposes.
It assesses an anti-inflationary policy against the standards of
Never-Never-
Land. Permanent inflation actually means an erratic inflation
with large
variations in the spread between expected and actual rate of
inflation. A
policy of permanent inflation induces thus substantial
variations in output
and unemployment. The cumulative loss of output from
intermittent recessions
whenever inflation abates exceeds probably the social cost of a
once and for
all transition. Permanent inflation imposes additional social
costs beyond
this cumulative output loss resulting from intermittent
"stagflationary"
recessions. The erratic course of permanent inflation increases
the un-
certainty confronting economic agents. The higher level of
uncertainty
shortens the horizon of investment projects, curtails the
average pay-off
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10.
period, and tends thus to lower the rate of investment in human
and non-human
capital. These repercussions are further aggravated by our tax
structure.
Permanent inflation typically fosters furthermore intermittent
controls over
prices, wages, and interest rates. Every new wave of inflation
encourages
the formation of new agencies and watchdogs Msupervisingn prices
or fosters
extended powers to already existing agencies. The bureaucracy
expands and
the power of government increases. The resources invested in
this manner
by the government sector hardly affect the ongoing increase in
costs and
prices. They do provide however substantial incentives
encouraging a wasteful
and distorted use of our productive opportunities. These
repercussions lower
over time the trend growth of normal output.
b. Irrelevance of Monetary Policy and Monetary Growth?
The second objection against an anti-inflationary monetary
policy
implicitly argues that the social cost imposed by such a policy
is indefinitely
high. This follows from the view that inflation evolves
irrespective and in-
dependently of monetary growth. This theme has become quite
fashionable in
wide circles. Its attraction follows to a large extent from the
political
message implicit in the view. It offers some further
justification for massive
social engineering and most particularly for the replacement of
markets with
political institutions. The evidence accumulated from a wide
array of in-
flationary experiences drawn from many different historical
circumstances and
countries thoroughly refutes however this contention. No
inflation ever emerged
without an excessive monetary growth usually produced by the
government. This
holds for the French inflation in the middle of the 14fth
century just as well
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11.
as for the Latin American inflation of the last 150 years, or
the Italian,
English, Turkish, Spanish, etc. inflation of the past ten years.
We find
in particular that every major or persistent acceleration of
monetary growth
is followed by rising inflation. Substantial variations over
time within
any given country or differences between countries at any given
time in the
level of monetary growth are clearly reflected by prevailing
magnitudes in
the rate of inflation. But the evidence shows more. It also
reveals that
inflation disappears whenever monetary growth subsides to a
level determined
by normal real growth and the trend in velocity. Recent
experiences in West
Germany, Switzerland and the United Kingdom offer remarkable
instructions for
our purposes. West Germany and Switzerland were more exposed to
the real
shocks produced by OPEC and the failure of agricultural crops
than the USA.
They still managed by a determined reduction of monetary growth
below the
excessive rates reached in 1972 to lower inflation to vanishing
levels.
There are many other cases from other periods and other
countries which exhibit
unambiguously that a persistent and sufficient decline of
monetary growth
effectively reduces the rate of inflation. Any contention that
inflation
proceeds irrespective of monetary policy and independently of
monetary growth
finds no support in the reality of inflation experiences.
c. A Need for Supplementary Measures?
Lastly, it is argued on occasion that general measures based on
monetary
and fiscal policy cannot form the sole instruments of an
anti-inflationary
policy. They need to be supplemented by "specific and
structural" measures.
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12.
But this position is fundamentally untenable and contradicted by
the facts
summarized by the previous paragraphs. In particular, the
contention that
general policy measures have been unable to lower inflation is
simply false.
The failure observed over fourteen years in the USA is not due
to price
movements being disconnected in a Mnew world governed by new
social structures"
from falling monetary growth produced by unstinting efforts of
our Federal
Reserve bureaucracy. The facts are very different. Our monetary
policy
never settled on such an effort and never showed any determined
attempt to
reduce monetary growth to the levels required for a
non-inflationary growth.
One might just as well attribute the failure of a car to move
because the
driver confuses brake and accelerator or fumbles with the
ignition to a
breakdown of the car. An emphasis on supplementary measures
lowers the like-
lihood of an effective anti-inflationary policy as it directs
attention away
from the basic requirement to lower monetary growth. The Federal
Reserve
bureaucracy essentially rejected in the past years and still
rejects this
very notion of monetary control for the purpose of taming
inflation.
Supplementary measures are basically useless as
anti-inflationary devices.
"Income policies", "social contracts", "orchestrated approaches"
or simple
coercion all failed to contain inflation. We need not invoke
ancient history
and the futile exercies of Diocletion, Julian the Apostate, Jean
Valois II of
France, Edward III of England and others. The experiences of the
postwar era
are quite sufficient to reveal that such measures may modify
somewhat the
shorter-run path of inflation with little longer-run effect in
the face of a
persistently excessive monetary growth. Moreover, the measures
mentioned above
hardly contribute to raise the credibility of a new attempt at
anti-inflationary
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13.
monetary policy. The uncertain and unreliable record of
policy-makers will
not dissolve with the cultivation of irrelevant and ineffective
measures.
Even under the best circumstances when they initiate a more
efficient use of
our resources the effect of specific or structural measures on
the rate of
inflation is minimal. It is quite illusory to cope with an 8%
p.a. rate of
inflation in such terms. It should be noted however that the
irrelevance of
supplementary (structural) measures with respect to inflation
does not imply
their irrelevance in terms of their cumulative effect on our
general welfare.
But I also wish to emphasize that some of the supplementary
measures
occasionally proposed are more likely to foster price increases
and a waste-
ful use of our resources.
9. Unemployment and Growth
The Full Employment and Balanced Growth Act 1978 imposes joint
goals
for inflation and unemployment. Policymakers are thus addressed
to pursue
a course of action lowering both inflation and measured
unemployment. This
course should also foster economic growth. Some clarification of
the role of
monetary policy in this context may be useful in view of many
prevalent con-
fusions. The case for an effective anti-inflationary monetary
policy is
frequently dismissed as an expression of "Republican values"
favoring higher
unemployment and lower inflation. This argument misrepresents
unfortunately
the actual issues confronting us. The choice is not between
lower unemploy-
ment and higher inflation on the one side or higher unemployment
and lower
inflation on the other side. Our choice lies between a temporary
increase
of unemployment in the present above its normal level in
conjunction with a
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14.
return to the normal level and no inflation in the future on the
one side,
or, on the other side, permanent inflation with intermittent
spurts of unem-
ployment beyond its normal level augmented very likely by an
increase in the
normal level. It is unfortunate that we do not possess a sure
way out of
inflation without suffering most likely some temporary increase
in unemploy-
ment. But there is really no alternative. All attempts to avoid
lower
monetary growth, exemplified by my proposal in a previous
section, which
insist on a variety of flspecific or structural" measures are
committed to
failures. They will produce an apparently more and more
intractable inflation
and the final "Latin-Americanization" of this country. And most
importantly,
the country will move even further away from the goals declared
by Congress.
A determined and generally understood sustained effort to reduce
monetary
growth does remove inflation. It will not raise the normal level
of unemploy-
ment but neither will it lower this level significantly at this
stage of our
inflationary heritage. The normal level of unemployment settled
probably
around 6% under the current institutions. Any effort to lower
this level
moves our attention beyond monetary policy. Monetary policy
could lower the
measured unemployment rate substantially below 6% only for a
short period and
would unleash thereby accelerating inflation. A reduction in the
normal level
of unemployment must be accomplished by major changes in our
social institu-
tions, (among others: minimum wage, the modus of food stamp plan
and unem-
ployment compensation or benefits). Government policies
reenforced in the
USA the upwards drift in the normal (and measured) unemployment
rate beyond
the range due to demographic trends in our labor force. A
similar pattern
holds for the fall in the rate of real growth observed in the
USA. The proper
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15.
approach to lower unemployment and higher real growth involves
under the
circumstances a systematic reassessment of a wide range of
inherited government
policies and regulatory procedures. This reexamination with
appropriate
actions should indeed be welcomed and encouraged. Our society
would benefit
and general welfare rise. But our political process may not
produce this
result and Congress may prefer to continue the prevailing
arrangement. But
this also means under the circumstances that one should
rationally accept the
consequences expressed in terms of unemployment and growth rate.
In particular,
these consequences offer no justification for an "expansionary"
monetary and
fiscal policy intended to force a lower rate of unemployment and
higher rate
of real growth. Monetary policy will not deliver this result. It
would only
yield on this course accelerating and erratic inflation with
unstable output
and rising level of normal unemployment. And lastly, any attempt
at curing
the problems of low growth and high measured unemployment with
larger doses of
the "specific and structural" measures which produced these
problems contributes
to accelerate the trend into stagnation and permanent
inflation.
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Homer JonesMarch 9, 1979
In the several years up to the middle of last fall, the
Federal Reserve was increasing the stock of money of the
nation inordinately. This rapid growth of money has been the
major cause of rapid and increasing inflation and reduction
in
the rate of growth of money was long overdue in order for
inflation to be moderated. But instead of a reasonable
moderate
monetary growth, which this Committee recommended last
September,
the Federal Reserve, about November 1, instituted a sudden
and
inordinate reversal of monetary policy. Since October
narrowly
defined money (Ml) has declined at a 2 percent annual rate,
after
increasing 7.8 percent in the preceding year. Money more
broadly
defined (M2) has grown at a 2 percent rate, after increasing
8.7
percent in the preceding year. The monetary base has grown at
a
6 percent rate compared with 9.7 percent in the preceding
year.
This sudden extremely tight monetary policy may lead us in
the
future to an unnecessarily acute recession, and the longer
the
present excessively restrictive policy continues the greater
the
likelihood and severity of such a recession.
We recommend that the degree of restraint on monetary growth
be moderated immediately. Specifically, we advise that the
growth
of that monetary aggregate consisting of currency and bank
deposits
in the hands of the public (M2) be increased for the next six
months
at a rate of about 6 percent a year. This would help to correct
the
excessive restraint of the last four months, yet would give
assurance
that the inflationary rate of expansion in the years before
last
November would not be resumed. A moderation of the recent
restraint
would reduce the likelihood of extreme recession, and at the
same
time would be beneficial to our foreign exchange rates. It
would
reduce the likelihood that we would later reverse policy to one
of
inordinate ease.Digitized for FRASER
http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis
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MONETARY AGGREGATESRATE OF GROWTH
Federal
Monetary
M2
Ml
Reserve Credit
Base
SinceOct.1978
8.5
6.0 .
2.2
- 2.2
YearEnd ingOct. 78
11.3
9.7
8.7
7.8
III 74to
III 78
9.3
8.5
9.3
6.4
III 76to
III 78
9.9
9.0
9.8
8.0
III 74to
III 76
8.7
8.1
8.9
4.8
III 72to
III 74
10.1
8.8
8.8
6.2
Homer JonesMarch 9, 1979
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tt £J LJ iTfi O ihi ii\i iTi I u L i «"\! ."h L 1
T O .
FROM
SUBJECT
SOMC
Jerry L. Jordan .PHONE Mr> 355-3101
ECONOMIC PROJECTIONS DATE March 5, 1979
I. Below are two tables showing projections for 1978 as of
the
September meeting last year (I) and actual results for 1978
(II).
TABLE I(percent changes)
Projections for 1978 as of September 78 SOMC Meeting
Q4/77-Q4/78
1977-1978
GNP
12.1
11.4
Output
4.1
4.0
Deflator
7.7
7.2
M1
7.6
7.7
M2
8.1
8.4
V V
GNP
TABLE II(percent changes)
Actual for 1978
Output Deflator
Q4/77-Q4/78
1977-1978
13
11
.0
.6
4.
4.
3
0
8
7
.3
.4
M M V
7.3 8.5 5.3 4.1
7.8 8.6 3.5 2.8
Growth of real output was higher than projected in September,
but lower
than the 4.9 percent change projected at the March 1978 meeting.
Inflation
was higher than projected, and measured velocity grew more
rapidly. These
results are very strongly influenced by the sharp increase in
real output
reported for Q4/1978 and the sharp decrease reported for money
growth in
Q4/1978,
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-2-
II. The next two tables show the projections for 1979 as of
the
September 1978 meeting (III) and for the March 1979 meeting
(IV).
TABLE III(percent changes)
Projections for 1979
GNP Output Deflator M M
Q4/78-Q4/79
1978-79
10-12
11.6
2-3
3.4
8-9
8.0
8.0 -9.0
7.9 8.8
3.0 2.0
3.5 2.6
TABLE IV(percent changes)
Projections for 1979 as of March 11 SOMC Meeting
1978-79
GNP
10.5
10.411,8
Output
2.0
z.o3.3
Deflator
-.7.18,3
8.3
M
7.0
6,8
M
8.0
fc. 38.3
3.3
4.7
The following assumptions for 1979 were put forth for the
September
1978 meeting.
11 The unemployment rate is expected to remain in the 5.5 to 6.5
percent
range in 1979, and the growth of employment, as well as the
labor
force, are likely to be slower than in 1978.
Both short- and long-term market interest rates are expected to
rise,
at least through mid-1979. The rise of high quality corporate
bond yields
will be about one-half percentage point while yields on
short-term market
securities will rise by 75 to 100 basis points.
Residential construction activity in 1979 will be down 10 t.o
15
percent compared with 1978, but non-residential construction
will exceed
1978. Real capital spending will still rise this year* but by
a
smaller amount than in 1978. Automobile sales can be expected to
decline
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—3—
about 10 percent for the full year, with a somewhat larger
decline occurring
in foreign cars and a smaller decline in sales of domestically
built cars.
Export volume will continue to rise in 1979 and will be
accompanied
by a smaller increase in import volume so the trade deficit is
expected
to by smaller. Government spending in nominal terms is projected
to rise
11 percent, about the same as nominal GNP»U
III. The deceleration in monetary growth in late 1978 and early
1979, in com-
bination with the announcements and actions of policymakers
since November,
1978 suggest that monetary growth this year will be less than in
1978. Interest
rate increases in the next six months are likely to be greater
than expected
last September, However, a peak in short-term market interest
rates is
expected to occur before year-end and declining market rates can
be expected
in 1980.
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SOMC
MONEY GROWTH RATES
(% Change from Previous Year)
FROM:
1971/Q1
Q2
Q3
Q4
1972/Q1
Q2
Q3
Q4
1973/Q1
Q2
Q3
Q4
1974/Q1
Q2
Q3
Q4
1975/Q1
Q2
Q3
Q4
1976/Q1
Q2
Q3
Q4
1977/Q1
1977/Q2
1977/Q3
1977/04
TO:
1972/Q1
Q2
Q3
Q4
1973/Q1
Q2
Q3
Q4
1974/Q1
Q2
Q3
Q4
1975/Q1
Q2
Q3
Q4
1976/Q1
Q2
Q3
Q4
1977/Q1
Q2
Q3
Q4
1978/Q1
1978/Q2
1978/Q3
1978/04
Ml
6.8
6.3
6.7
8.4
8.5
8.0
7.2
6.2
5.9
5.7
5.3
5.1
3.8
4.2
5.0
4.6
5.3
5.3
4.6
5.8
6.5
6.8
8.0
7.9
7.7
8.2
8.1
7.3
M2
10.9
9.7
10.4
11.2
10.5
10.0
9.2
8.8
9.0
8.8
8.3
7.7
6.7
7.3
8.4
8.4
9.6
9.6
9.3
10.9
11.0
10.8
11.1
9.8
8.8
8.6
8.6
8.5
MONETARYBASE
7.1
7.2
6.9
8.3
8.9
8.9
9.1
8.1
8.1
8.4
8.4
9.0
8.2
7.8
8.0
7.6
8.0
8.7
8.3
8.4
8.3
7.9
8.5
8.8
9.5
9.4
9.4
9.6
M1+
8.9
7.7
8.2
9.2
8.4
7.6
6.3
5.2
5.1
5.2
5.4
5.5
5.2
6.8
8.5
8.8
11.0
11.4
10.6
12.6
12.5
11.2
11.3
9.3
7.2
7.0
6.4
5.3
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TWO-QUARTER COMPOUNDED ANNUAL RATES OF CHANGE
SOMC
Ql/71-
Q2/71-
Q3/71-
Q4/71-
Ql/72-
Q2/72-
Q3/72-
Q4/72-
Ql/73-
Q2/73-
Q3/73-
Q4/73-
Ql/74-
Q2/74-
Q3/74-
Q4/74-
Ql/75-
Q2/75-
0.3/75-
Q4/75-
Ql/76-
Q2/76-
Q3/76-
Q4/76-
Ql/77-
Q2/77-
Q3/77-
Q4/77-
Ql/78-
Q2/78-
Q3/71
•Q4/71
•Ql/72
•Q2/72
•Q3/72
•Q4/72
•Ql/73
•Q2/73
•Q3/73
•Q4/73
•Ql/74
•02/74
•Q3/74
•Q4/74
•Ql/75
•02/75
•Q3/75
•04/75
•01/76
•02/76
•03/76
•Q4/76
•Ql/77
-Q2/77
-Q3/77
-Q4/77
-Ql/78
-Q2/78
-Q3/78
-Q4/78
Ml
8.2
4.8
5.4
7.8
8 .1
9.0
9.0
7 . 1
5.5
5.3
6.3
6.1
4.2
4.0
3.3
4 .3
6.7
4.9
3 . 9
5.7
5.4
5.9
7.6
7.6
8.3
8.2
7.2
8.2
9.0
6.4
M2
11.5
8 . 1
10.2
11.3
10.7
11.0
10.4
9 . 0
8 . 0
8.6
10.0
8.9
6.7
6.4
6 .6
8 . 3
10.2
8 .6
8 . 9
10.7
9.7
11.1
12.3
10.4
9 . 9
9.3
7.7
7.9
9.5
9.1
MONETARYBASE
8 . 2
6 .6
6.0
7 . 8
7 .8
8 .9
1 0 . 1
8.8
8 .1
7-4
8 .1
9.5
8.8
8.5
7 .7
7 . 1
8 . 3
8 .2
7 . 8
9 .2
8.7
7 .7
7.9
8 . 1
9 .2
9.5
9.8
9.3
9.0
9.9
M1+
1 0 . 1
6 . 3
7.8
9 . 1
8.6
9.3
8.3
5.8
4.4
4 .5
5.8
5.9
4 .9
5.1
5.5
8.5
1 1 . 6
9 . 1
1.0.4
13.8
10.7
11.5
14.2
10.9
8.5
7.7
6.0
6.2
6.8
4 .3
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ECONOMIC OUTLOOK(BILLIONS OF DOLLARS — SEASONALLY ADJUSTED
ANNUAL RATES)
GROSS NATL PRODUCT%CH
CONSTANT DOLLAR 3NP%CH
PRICE DEFLATOR%CH
CONSUMPTION EXPENDITURES
%caDURABLES
%CH
NONDURABLES%CH
SERVICES
INVESTMENT EXPENDITURES%CH
NONRES FIXED EXPEND%CH
PRODUCERS DUR EQUIP%CH
BUSINESS STRUCTURES%CH
RES FIXED EXPEND
ACTUAL19"8:4
2210.814."
1412.26.1
1.56548.1
1402.214.0
209.621.8
550.815.2
641 .810.6
359.911 ."
19 9:1
22"1.613.5
1422.12.8
1.59"48.4
1435.19."
212.45.5
563.99.9
658.811.0
3-4.717.5
19"*9:2
2319.08.6
1422."0.2
1.63003.4
1466.99.2
214.54.0
5"6.99.5
6"5.510.5
3"~."3.2
19 9:
2341.3.
1408.- 4 .
J
59
40
1.66258.2
1495.
214.- 0 .
539.3.
691.10.
361.-15.
09
09
1
91
83
19"~9
23"25
1400-2
FORECAST:4
.9
.5
.4
.2
1 .6944".9
1521
212-3
6018
"0310
354-8
.9
.4
.1
.5
.1
.4
.1
.0
.3
1980:1
2414."".2
1398.6-0.5
1.7265".8
1554.08."
214."5.0
613.53.5
"25.810.0
353.6-0.5
1980:2
2433.011.8
1412.44.0
l."580".5
1593.910."
222.816.0
62".19.2
"44.010.4
3-1.121.3
1980:
2555.12.
1428.4.
3
52
36
1.7892-.3
1636.11.
232.19.
641.9.
"63.10.
389.21.
92
0
23
06
54
19 80:
2631.12.
1445.4.
i
9c
08
1.8214".4
1681.11.
243.18.
655.9.
"83.11.
404.16.
95
09
4
20
64
ueryi wExecutive V.P. & EconomistHarris Trust & Savings
BankChicago, IL 60690
INVENTORY CHANGE
NET EXPORTS
GOVT PURCHASES%CH
FEDERAL%CHMILITARY
%CHOTHER
%CH
STATE & LOCAL%CH
YEARS19" 19"8 19-9 1980
235.013.9
151.012.6
84.016.2
112.513.5
12.4
-6.9
455.615.2
163.426.7
102.110.461.360.1
292.29.3
242.413.2
155.612.8
86.814.0
112.3-0.7
20.0
-2.4
464.27.3
165.34.7
104.0".7
61.30.0
298.99.5
248.811.0
159.39.9
39.513.0
109.5-9.6
19.4
1.4
4~3.O7.8
16".34.9
106.0".9
61.30.0
305."9.*4
253.06.9
161.65.9
91.48.3
104.8-16.1
4.0
3.0
481.7-.6
169.34.9
108.0".8
61.30.0
312.49.1
255.84.5
162."2.8
93.1".6
100.2-16.4
-2.0
3.0
494.010.6
1"4.813.6111.915.262.910.9
319.29.0
256.81.6
162.80.2
94.03.9
103.313.0
-6.5
4.0
503.1".6
1"".35.8
113.8".0
63.53.9
325.88.5
259.44.1
164.44.0
95.04.3
109.425.8
2.3
5.6
512.47.6
1"9.96.0
115.8~.2
64.13.8
332.58.5
264.63.3
168.09.1
96.66.9
116.528.6
8.4
".2
521 9".6
182.55.9
117.87.1
64."3.8
339.48.6
2" 1.210.4
1 7 3 . 01 2 . 4
9 8 .6 . 8
1 2 3 . 62 6 . 7
9 . 8
1 0 . 2
5 3 5 . 2. 1 0 . 6
1 8 8 . 81 4 . 5
1 2 2 . 31 6 . 26 6 . 51 1 . 6
3 4 6 . 48 . 5 ,
1 8 8 " . 2 2 1 0 6 . 6 2 3 2 6 . 3 2 5 2 1 . 31 1 . 0 1 1 . 6 1
0 . 4 8 . 4
1 3 3 2 / " 1 3 8 5 . 1 1 4 1 3 . 4 1 4 2 1 . 14 . 9 3 . 9 2 . 0
0 . 5
1 . 4 1 5 8 1 . 5 2 0 4 1 . 6 4 6 1 1 . " " 3 85 . 9 7 . 4 8 . 3
7 . 8
1 2 0 6 . 5 1 3 3 9 . " 1 4 7 9 . " 1 6 1 6 . 71 0 . 7
1"8.413 .9
4"9.08 .2
5 4 9 . 111 .8
29".822 .6
190 .415 .7
126 .51 7 . 9
6 3 . 91 1 . 5
9 1 . 93 4 . 8
3 9 3 . 99 . 6
1 4 5 . 111 .79 4 . 3
8 .65 0 . 8
2 4 8 . 98 . 4
19".610 .8
525 .89 .8
616 .312 .2
344 .515 .7
222.116 .6
144 .614 ,2
7 7 . 521 .3
106 .816 .2
1 5 . 6 15 .7
- 1 1 . 2 - 1 1 . 8
154.06 . 2
9 9 . 55 .6
5 4 . 5- . 3
280 .212.6
10.5
213.3".9
53 2.810.8
6 8 3 . "10 .9
3 6 " . 06 . 5
2 5 0 . 012 .6
159.81 0 . 5
9 0 . 216.4
106.7- 0 . 1
10.3
1.3
4 3 4 . 2 4 7 8 . 210 .2 10 .1
9 . 3
2 2 8 . 3- . 1
634 .48 .9
7 5 4 . 01 0 . 3
3 7 9 . "3 .4
263.05 .2
16".14 . 5
9 6 . 06 .4
113 .26 .1
3 . 5
6 .7
5 1 8 . 18 . 3
169 .2 1 8 2 . 19.8 " . "
107 .58 .0
61 .713.2
1 1 7 . 49 . 3
6 4 . "4 . 9
3 0 9 . 11 0 . 3
3 3 6 . 08 . "
NOTE: PERCENTA3E CHANGES AT ANNUAL RATES; PRELIMINARY DATA FOR 7
8 : 4
Digitized for FRASER http://fraser.stlouisfed.org/ Federal
Reserve Bank of St. Louis
-
2/2/79
£>eryx w. pExecutive V.P. & EconomistHarris Trust &
Savings Bank, Chicg^^^I^^is 60690
(BILLIONS OF DOLLARS---SEASONALLY ADJUSTED ANNUAL RATES)
PRETAX PROFITS*%CU
TAX LIABILITY\Ci\
AFTER TAX PROFITS
AFT TAX PROF ADJ^
tenPERSONAL INCOME%CH
TAX & NONTAX PAYMENT
DISPOSABLE INCOME%CH
PERSONAL OUTLAYS
PERSONAL SAVINGS%CH
SAVING RAT£(%)
EMPLOYMENT
LABOR FORCE%CH
UNEMPLOYMENT RATE(%)
PRODUCTIVITY*%C\\
INDUSTRIAL PRODUCTION
MONETARY BASE-(MB)iCH
VELOCITY OF rtBiCU
MONEY SUPPLY- (M2)
VELOCITY OF M2%C1I
ACTUAL
T9T8T4
22749
9444
13253
8433
178613
27519
151112
143914
72-18
4
.0
. 2
.4
.0
.6
. 0
.9
. 2
.4
. 2
.0
.2
.4
.2
.2
.1
.31
.8
95.6163.8
101.5243.1
5.833
1.1732.4
1.4957.0
141.4339.9
15.6314.4
869.9677.7
2.546.
16
1979
226-1
90-16
13510
8925
183611
270-6
156515
147410
90145.
5
.0
.8
.2
.9
.8
.2
.8
.5
.1
.6
.8
.0
.3
.8
.3
58
8
96.0411.8
102.2002.7
6.026
1.171.
74
1.5073.2
144.3008.4
15.7422.9
880.0004.7
2.5816.5
1979
222-6
88-6
133-6
88—7
18769
27710
15988
15089
89.-3
5
: 2
.0
.9
.6
.9
.4
.9
.2
.0
.1
.0
.4
.1
. 7
.8
.9
.6
8.1
6
96.2010.7
102.8002.4
6.419
1.1"0 .
70
1.499- 2 . 1
145.8004.2
15.9054.2
891.0005.1
2.6033.3
1979:3
208-22
83-22
125-22
84-16
19117
2828
16287
15388
89-1
5
.6
.0
.2
.0
.4
.0
.4
.4
.2
.7
.8
.0
.4
.6
.9
.2
.5
.4
.5
95.944- 1 . 1
103.2001 .6
7.031
1.1"- 2 .
04
1.458- 1 0 . 5
147.3004.2
15.896- 0 . 2
902.0005.0
2.596- 1 . 0
FORECAST1979
199- 1 6
78- 1 9
120- 1 5
82- 8
19426
2888
16546
15677
87-10
5
:4
.2
.8
.9
.3
. 3
.2
.4
.9
.9
.8
.6
.5
.3
.5
.2
.6
[3
.3
95.859- 0 . 4
103.6001.6
7.4"'2
1.165- 1 . 7
1.432- 6 . 9
149.2005.3
15.9 040.2
918.5007.5
2.583- 1 . 9
1980:1
196.5- 5 . 3
77,8- 5 . 3
118.7- 5 . 3
80.9- 7 . 2
1983.88.7
296.611.6
1687.28.2
1600.98.9
86 .3- 3 . 7
5 . 1
95.8590.0
10 4.0001.6
7.828
1.1650.0
1.426-1 .7
151 .9007.4
15.897- 0 . 2
941.70010.5
2.564- 2 . 9
1980
20315
8015
12315
825
204012
30817
173211
164210
89.17,
5 .
: 2
.9
.9
.7
.9
.2
.9
.0
.4
.8
.0
.5
.1
.3
.1
4.8
97
2
96.3422.0
104.4001.5
7.718
1.1722.4
1.4496.6
155 0008.4
16.0193.1
967.70011 .5
2.5660.3
1980
21320
8420
12920
8412
209912
31814
178011
168711
9316
5
:3
.5
.2
.5
.2
.0
.2
.4
.2
.4
.0
.8
.1
.6
.6
.1
.3
.5
.9
»*
96.9972.7
104.9001.9
7.534
1.1802.8
1.4778.0
158.2008.5
16.1543.4
994.40011.5
2.570 .
06
1980:4
223.CJ20.1
88.520.1
135.020.1
89.426.1
2162.112.5
331.917.5
1830.211.6
1733.811.5
96.413.0
5 . 3
97.6752.8
105.5002.3
7.417
1.1882.7
1.5068.1
161.6008.9
16.28"3.3
1023.00012.0
2.5730.4
YEARS1977
17311
7111
10211
7215
152910
22615
130310
1236,10,
66.- 1 ,
5 .
.9
.5
.8
.8
.1
.4
. 3
. 3
.0
.7
.0
.0
.0
.0
.1
.7
.9, 7
,1
90.5433.5
97.372.
'58
7.025
1.1591.3
1.3715.6
1978
20216
8316
11816
765
170711
25613
1451,11,
1374.11.
76.14.
5 .
.5
. 4
. 9
.8
.6
.1
.2
.3
.3
.7
.2
.4
.2
.4
5.2
8,7
3
94.3814 .2
100.413 .
71
6.000
1.1630.4
1.4505.8
1979
2145
851
1288
8613
189110
2799
.0
.7
.2
.6
.7
.6
.2
.1
.6
.8
.9
.3
161K711.1
1522,10,
89.16.
5 .
.5
.8
.2
.3
,5
96.0111.7
102.9502.5
6.7117
1.1720.8
1.4741.6
1980
209- 2
82-2
126-1
84- 2
20719
31412
1757,9
1666.9.
91.2.
5 .
96.710.
.3
.2
.9
.7
.4.8
.1
. 4
.5
. 5
.0
.2
.6
.1
.1
.4
,55
2
87
104.7001.7
7.624
1.1760 .3
1.465- 0 . 6
1 2 4 . 8 5 0 1 3 6 . 6 6 7 1 4 6 . 6 5 0 1 5 6 . 6 7 58 . 3 9 .
5 7 . 3 6 . 8
15.1142.4
15.4092.0
15 .8622.9
16 .0891.4
7 7 9 . 6 5 8 8 4 4 . 6 4 2 8 9 7 . 8 7 5 9 8 1 . 7 0 01 0 . 7 8
. 3 6 . 3 9 . 3
2.4200 .3
2 . 4 9 33 .0
2 .5913 .9
2.56 8-0 .9
NOTE: PUOFITS FOR " 8 : 4 ARE ESTIMATES; PRODUCTIVITY IS
MEASURED AS OUTPUT PEH HOUR--NONFARM BUSINESS1) AFTER TAX PROFITS
ADJUSTED TO EXCLUDE INVENTORY PROFITS AND ALLOW FOR DEPRECIATION AT
REPLACEMENT COST
Digitized for FRASER http://fraser.stlouisfed.org/ Federal
Reserve Bank of St. Louis
-
Beryl W. SprinkelExecutive V.P. & EconomistHarris Trust
& Savings, Chicago, Illinois 60690
2/2/79
ACTUAL
ECONOMIC OUTLOOK
FORECAST19 78:A 1979:1 1079:2 1979:3 1979:4 1980:1 1980:2 1980:3
1980:4
INTEREST RATES
NEW ISSUE AA INDUS BONDS 9.000 9-200 10.000 10.000 9.750 9.500
9.250 9.000 9.000
NEW ISSUE AA UTIL BONDS 9.370 9.700 10.300 10.300 10.000 9.900
9.600 9.400 9.400
PRIME RATE 10.793 11.750 12.500 11.750 11.000 10.000 9.000 8.000
8.000
COMMERCIAL PAPER 4-6 I10S. 9.897 10.600 12.000 11.000 10.000
9.000 8.000 7.000 7.000
AUTO SALES 1)
DOMESTIC
IMPORTS
HOUSING STARTS 1)
1 1 . 1 0 0 1 0 . 8 0 0 1 0 . 6 7 6 1 0 . 1 0 8 9 . 3 1 7 9 . 3
9 0 9 . 9 9 0 1 0 . 5 9 0 1 1 . 3 1 0
9 . 2 0 0 9 . 0 0 0 8 . 9 0 0 8 . 4 0 0 7 . 7 4 0 7 . 8 0 0 8 .
3 0 0 8 . 8 0 0 9 . 4 0 0
1 . 9 0 0 1 . 8 0 0 1 . 7 7 6 1 . 7 0 8 1 . 5 7 7 1 . 5 9 0 1 .
6 9 0 1 . 7 9 0 1 . 9 1 0
i2 . 1 2 9 1 . 9 0 0 1 . H 3 0 1 . 7 0 0 1 . 5 0 0 1 . 6 0 0 1 .
8 0 0 1 . 9 0 0 1 . 9 5 0 !
YEARS1977 1978 1979 1980
7.918 8.735 0.738 9.188
8.325 9.098 10.075 9.575
6.824 9.052 11.750 8.750
5.612 7.994 10.900 7.750
11 . 184 1 1.293 10.225 10.320
9.132 9.305 8.510 8.575
2.066 1.992 1.715 1.745
1 . 9 6 7 2 . 0 0 9 1 . 7 3 3 1 . 8 1 3
!)«IN MILLIONS OF UN ITS--S EASONAI.LY ADJUSTED ANNUAL RATES
Digitized for FRASER http://fraser.stlouisfed.org/ Federal
Reserve Bank of St. Louis
-
?DOPLOT1
HlSKYL W. Sl'HINKEL
ItAHHIS TRUST AND SAVIN OS DANK
MONETARYBASE%CH6
12.00000
MONEY%CH6.10.11111
MONEY2%CH6
CURR%CH6
. _ • _ - _ . 8.222222
6.333333
4.444444
2.555556
.6666667
-1.22222
-3.11111
•5.00000 l l l I l l I l lFEB MAR APR MAY JUN JUL AUG SEP OCT
NOV DEC JAN FEB
Digitized for FRASER http://fraser.stlouisfed.org/ Federal
Reserve Bank of St. Louis
-
?LOPLOT1
MONETARYBASE%CH6
12.00000'
MONEY%CH6• 10.11111'
MONEY2%CH6
CURR%CH6
• — . — - — - 8.222222*
6.333333'
4.444444'
2.555556'
,6666667'
-1.22222'
-3.11111'
-5.00000" l l l l l I l l I l l 1 l l l l lJ F M A M J J A S
1973O N D J P M A M J
1974
Digitized for FRASER http://fraser.stlouisfed.org/ Federal
Reserve Bank of St. Louis
-
DOPLOTl
BKRYL W. SPRINKBI.
CXCCUTIVC VICE PRCSIDCNT ANO CCONOMIST
HARHIS TRUST A N D BAVINOS D A N E
MONETARYBASE%CH6
MONEY%CH6
12.00000
.10.11111
MONEY2%CH6
CURR%CH6
. — . — • — . 8.222222
6.333333
4.444444
2.555556
.6666667
-1.22222
-3.11111
-5.00000 — I I I I IDEC JAN1968
FEB MAR APR MAY iJUN JUL1969
AUG SEP OCT NOV DEC
Digitized for FRASER http://fraser.stlouisfed.org/ Federal
Reserve Bank of St. Louis
-
WEEKLY FEDERAL RESERVE REPORT March 9, 1979
Prices of key industrial commodities have been moving up with
explosive force in re-cent weeks. The 12% annual rate of increase
in the producer price index for finishedgoods that was reported
yesterday by the Bureau of Labor Statistics is, in fact, onlythe
tip of the iceberg. According to the BLS, the weekly index of
sensitive spotcommodity prices averaged 271.1 (1967=100) during the
four weeks ended March 6, up atan 82.6% compound annual rate from
the average of 258.85 in the four weeks endedFebruary 6. Since the
beginning of January, this index has advanced at a 50% com-pound
annual rate. Most disturbing in this weekfs report were increases
of 2.9% (inone week) in livestock prices, and a 5.2% surge in
metals prices (copper, lead, andsteel scrap, as well as tin and
zinc).
When combined with the continuing evidence of strong demand for
short-term credit,the explosion in materials prices since the first
of the year suggests to us thatsome of the economic distortions
that normally characterize a cyclical peak in theeconomy are now
starting to come into view. Total commercial paper outstanding
av-eraged $86.8-billion in the four weeks ended on March 7, up at a
42.8% seasonallyadjusted compound annual rate from the prior
four-week period, and up at a 44.1%annual rate over the past three
months. In the week ended February 28, the MorganStanley proxy for
total short-term business credit outstanding rose $942-million,
andnow stands $3.4-billion higher than at the beginning of the
year. Against thisbackground, it is yery likely that some
anticipatory inventory accumulation is nowunder way on the part of
businessmen trying to hedge expected future price
increases.Certainly it has been profitable to borrow money at an
effective cost ranging be-tween 10% and 14% in order to buy
materials whose prices have been rising at roughlytriple that rate.
Furthermore, the full impact of the tightening of world oil
sup-plies due to the Iranian crisis has yet to hit the American
economy.
At the same time, the monetary data rein-force our belief that
Federal Reserve poli-cy is belatedly swinging sharply in
thedirection of restraint. The annual rateof increase in the
monetary base, whichwas 10% from December 1977 through October1978,
dropped to 6.5% from October throughFebruary. Since the public's
holdings ofcurrency have continued to rise at a 10%annual rate in
this period, growth in thereserve base of the banking system
hasbeen brought to a halt. The slowdown inbank reserve growth,
about which we havecommented repeatedly in recent weeks, isin our
opinion the most important influenceon the overall deceleration in
monetaryexpansion. Figure 1 on page 3, which de-picts the
procyclical record of Federal Re-serve monetary policy, shows the
downturnin the underlying rate of money growth thatthe central bank
is now starting to imple-ment. (The underlying rate of
expansion
CONTENTS
The Explosion in Commodity Prices
A Return to Selective Controls?
Targets for Monetary Growth
Outlook for Treasury Financing
Federal Reserve Action andMonetary Growth
Figures of the Week
Statistical Appendix
1
3
4
6
7
12
Digitized for FRASER http://fraser.stlouisfed.org/ Federal
Reserve Bank of St. Louis
-
-2-
in M-l was 7.32% for the 12 months ended February 1979, down s
igni f icant ly from thepeak rate of 7.99% for the 12 months ended
September 1978.) Since this is a measureof M-l (currency and most
demand deposits), i t is indeed distorted by the structuralchanges
in the banking system that took place last November — the
introduction ofthe automatic transfer service and the sh i f t in
Treasury cash management practices.However, the more broadly
defined aggregates, which are much less affected by thesechanges,
also have slowed down.
Federal
(Weekly Averages of Daily
Money Supply (M-l)* (1)
M-l-Plus* (1)
Money Supply Plus Comm'lBank Time Deposits OtherThan Large CDs
(M-2)* (1)
Monetary Base* (2)
Adjusted Federal ReserveCredit* (2)
Total Effective BankReserves* (1)
Member Bank Borrowing (2)
Short-Term BusinessCredit (1) R
Total Commercial PaperOutstanding* (1)
Business Loans:
All Large Banks (1) R
New York City Banks* (2)
Chicago Banks (2) R
Latest Week
$356,500
577,400
876,000
144,200
125,400
44,500
1,026
Reserve [
Figures;
Data
in Millions of Dollars)
Change FromPrev.
$- 1
- 1
+
+
-
Week
,700
,400
700
500
200
600
58
Wednesday Figures
228,522
87,903
133,949
38,451
13,478
+
+ 1
+
+
-
942
,397
358
64
27
Rates3 Months
- 2.3%
- 5.3
+ 1.3
+ 6.4
+ 9.1
- 0.7
NA
N/AV
+41.4
N/AV
+ 2.2
N/AV
of Change6 Months
+ 1.1%
- 1.3
+ 4.7
+ 8.1
+10.7
+ 3.7
NA
N/AV
+31.3
N/AV
+12.6
N/AV
Over1 Year
+ 4.8%
+ 2.5
+ 7.0
+ 8.3
+ 9.8
+ 5.0
NA
N/AV
+31.1
N/AV
+12.2
N/AV
R = Series Revised; Figures are not comparable with those
published during 1978.
*Seasonally Adjusted NA = Not Applicable N/AV = Not
Available
Rates of change are compound annual rates. Short-term business
credi t includescommercial and industr ial loans at large banks
plus loans sold to a f f i l i a t e s lessbankers' acceptances and
commercial paper held in por t fo l io plus loans at large banksto
finance companies and nonbank f inancial ins t i tu t ions plus
nonbank commercialpaper.
(1) February 28 (2) March 7
Digitized for FRASER http://fraser.stlouisfed.org/ Federal
Reserve Bank of St. Louis
-
-3-
Figure 1
The Cyclical Record of Federal Reserve Policy
9.0%
7.0
5.0
The rate of change in a 12-month moving average of M-1centered
on the sixth month of each period
? 3.0
1.0
-1.0
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978
Shaded areas represent periods of recession as designated by the
National Bureau of Economic Researchexcept for the mini-recession
of 1966-1967.
Sources: Chase Econometric Associates Data Base; Morgan Stanley
Research
In our opinion, a confrontation is developing between an
apparent surge of aggregatedemand and the belated resolve of the
monetary authorities to bring a clearly ex-cessive rate of increase
in total spending under control. In time, this will in-evitably
lead to a deceleration in the growth of final demand (GNP less the
change ininventories). As businessmen perceive the shift in their
sales prospects, they willbegin to move to trim their inventories
by cutting back production, thus initiating acontraction in
aggregate economic activity. However, we are not yet at that
point,and before the economy reaches its crest, pressures in the
financial markets arelikely to intensify. Short-term interest rates
should rise above present levels,thus leading to an even sharper
downward slope in the yield curve. We continue tobelieve that the
Federal funds rate will average between 10.5% and 11.5% over
thenext three months, and in individual weeks it could easily reach
levels well abovethat range.
A RETURN TO SELECTIVE CONTROLS?
It is very clear that the monetary authorities -- despite their
repeated assertionsthat they wish to slow total spending in such a
manner to avoid a reduction in aggre-gate real output -- are now
becoming impatient. They are obviously, and correctly,concerned
with the explosive behavior of the price level. But they seem
unwilling towait for a gradual unwinding of the excess demand that
they have helped to create.In the first instance, the authorities
are plainly ignoring the monetary growth tar-gets that Mr. Miller
announced just two weeks ago (see Tables 1 and 2 on page 4).
Thecurrent levels of both M-1 and M-2 are far below the lower ends
of the ranges
Digitized for FRASER http://fraser.stlouisfed.org/ Federal
Reserve Bank of St. Louis
-
-4-
Table 1
Targets for Monetary Growth:($ Billions)
M-l
Date
7/778/779/7710/7711/7712/771/782/783/784/785/786/787/788/789/7810/7811/7812/781/792/793/794/795/796/797/798/799/7910/7911/7912/79
M-l(Actual)
$328.7330.6333.1335.4336.5338.7341.9342.4343.2347.9350.7352.5354.5357.0361.1361.6361.0361.5359.9358.8
Target #16 Target #15 Target #14 Target #13 Target #12 Target
#11Upper Lower Upper Lower Upper Lower Upper Lower Upper Lower
Upper Lower+4.5% +1.5% +6.0% +2.0% +6.5% +4.0% +6.5% +4.0% +6.5%
+4.0% +6.5% +4.0%
$361.4362.7364.1365.4366.8368.1369.5370.9372.2373.6374.9376.3377.6379.0
$361.4361.8362.3362.7363.2363.6364.1364.5365.0365.4365.9366.3366.8367.2
$357.5359.3361.1362.9364.7366.5368.3370.0371.8373.6375.4377.2379.0380.8
$357.5358.1358.359.359.9360.5361.1361.7362.3362.9363.5364.1364.7365.3
$350.4352.3354.2356.1358.0359.9361.8363.7365.5367.4369.3371.2373.1375.0
$350.4351.5352.7353.9355.0356.2357.4358.5359.7360.9362.0363.2364.4365.5
$342.5344.4346.2348.1349.9351.8353.6355.5357.3359.2361.1362.9364.8366.6
$342.5343.6344.8345.9347.1348.2349.3350.5351.6352.8353.9355.1356.2357.3
$336.9338.7340.5342.3344.2346.0347.8349.6351.5353.3355.1356.9358.8360.6
$336.9338.0339.1340.2341.4342.5343.6344.7345.8347.0348.1349.2350.3351.5
$330.8332.6334.4336.2338.0339.8341.6343.3345.1346.9348.7350.5352.3354.1
$330.8331.9333.0334.1335.2336.3337.4338.5339.6340.7341.8342.9344.0345.1
Target #11 was established by the Federal Open Market Committee
on October 18, 1977; Target #12, on February 28, 1978; Target #13,
onApril 18; Target #14, on July 18; Target #15, on October 17; and
Target #16, on February 6, 1979.
Sources: Federal Reserve Board; Morgan Stanley Research
Table 2
Date
7/778/779/7710/7711/7712/771/782/783/784/785/786/787/783/789/7810/7811/7812/781/792/793/794/795/796/797/798/799/7910/7911/7912/79
M-2(Actual)
$783.9789.6795.5801.2805.2809.4816.0819.4822.6830.3836.7842.6848.7856.9866.2870.9874.3876.3875.4877.0
TargetUpper+8.0%
$873.8879.7885.5891.3897.1903.0908.8914.6920.4926.3932.1937.9943.7949.6
#16Lower+5.0%
$873.8877.5881.1884.8888.4892.0895.7899.3903.0906.6910.2913.9917.5921.2
TargetUpper+9.0%
$857.3863.7870.1876.6383.0889.4895.8902.3908.7915.1921.6928.0934.4940.9
Targets
#15Lower+6.5%
$857.3861.9866.6871.2875.8880.5885.1889.8894.4899.0903.7908.3913.0917.6
for Monetary Growth:($ Billions)
TargetUpper+9.0%
$836.5842.8849.1855.4861.6867.9874.2880.5886.7893.0899.3905.5911.8918.1
: #14Lower+6.5%
$836.5841.1845.6850.1854.7859.2863.7868.3872.8877.3881.8886.4890.9895.4
M-2
TargetUpper+9.0%
$819.3825.5831.6837.8843.9850.1856.2862.3868.5874.6880.8886.9893.1399.2
#13Lower+6.5%
$819.823.828.832.837.841.846.850.854.859.863.868.872.877.
38261504837260
TargetUpper+9.0%
$805.3811.3817.3823.4829.4835.5841.5847.5853.6359.6865.7871.7877.7883.8
#12Lower+6.5S
$805.3809.6814.0818.4822.7827.1831.4835.8840.2844.5848.9853.2857.6862.0
TargetUpper+9.0%
$789.7795.6801.5807.4813.4819.3825.2831.1837.0843.0848.9354.8860.7866.7
mLower+6.5%
$789.7793.9798.2802.5806.8811.1815.3819.6823.9828.2832.4836.7841.0845.3
Target ?11 was established by the Federal Open Market Committee
on October 18, 1977; Target ?12, on February 28, 1978; TargetApril
18; Target #14, on July 18; Target #15, on October 17; and Target
?16, on February 6, 1979.
Sources: Federal Reserve Board, Morgan Stanley Research
13, on
Digitized for FRASER http://fraser.stlouisfed.org/ Federal
Reserve Bank of St. Louis
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-5-
Figure 2
The Underlying Rate of Growth in Federal Spending Slows Down
The rate of change in a 12-month moving average of unified
Federal budget expenditurescentered on the sixth month of each
period
25.0% "1
3.4
-2.0
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978
Shaded areas represent periods of recession as designated by the
National Bureau of Economic Researchexcept for the mini-recession
of 1966-1967.
Sources: Chase Econometric Associates Data Base; Morgan Stanley
Research
established by the Federal Open Market Committee, but this has
produced no visibleaction to rectify the situation.
Moreover, in moving to restrict somewhat the interest that banks
and thrift institu-tions can pay on so-called money market
certificates (six-month time deposits whoseinterest rates are tied
to the rate on six-month Treasury bills), the authoritieshave given
a strong hint that they are prepared to use selective controls, if
neces-sary, to cool off the economy. All types of deposit
institutions have been prohibi-ted from compounding the interest on
such instruments (effective March 15), and sav-ings and loan
associations will no longer be allowed to pay 25 basis points more
thanthe six-month bill rate. According to one calculation, these
changes would reducethe effective yield on a certificate issued by
a savings and loan association thisweek to 9.41% from 10.29%.
The change in the regulations comes at a time when the savings
and loan industry, inparticular, is heavily overcommitted. Future
lending commitments at the end ofJanuary totaled $32.9-billion,
seasonally adjusted, only slightly below the recordpeak of
$34-billion in November 1978. With the prospect that, at minimum,
the inflowof funds from deposits of this type will slow, managers
of thrift institutions arelikely to curtail sharply their
willingness to make additional lending commitmentsuntil the present
total is worked down to more manageable levels. Then, too, thereis
the threat that even more severe restrictions on money market
certificates mightbe proposed in the future. Since the total of
such deposits is now well in excess of$100-billion, this threat has
to be taken seriously. Without debating the theoreti-cal merits or
demerits of this approach, there is little question but that in
theshort run it will have restrictive and destabilizing impact on
the flow of funds intothe housing market.
Digitized for FRASER http://fraser.stlouisfed.org/ Federal
Reserve Bank of St. Louis
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-6-
THE OUTLOOK FOR TREASURY FINANCING
A key element in the Carter Administration's economic strategy
for 1979 is a policyof "fiscal restraint,11 a marked deceleration
in the rate of growth in Federal spending,with cutbacks in social
service programs more than offsetting a modest increase indefense
outlays. An early result of this effort may just possibly be
visible in thedrop in the underlying rate of growth in Federal
spending that is shown in Figure 2on page 5. However, we are
doubtful that this nascent trend will continue for long,and we are
also highly skeptical that Mr. Carter will come anywhere near his
goal ofa Federal budget deficit of less than $30-billion in the
fiscal year that ends onSeptember 30, 1980.